In Integrative Case $10\mathrm{.}1,$ we projected financial statements for Starbucks for Years $+1$ through

$+5.$ In this portion of the Starbucks Integrative Case, we use the projected financial statements

from Integrative Case $10\mathrm{.}1$ and apply the techniques in Chapter $13$ to compute Starbucks'

required rate of return on equity and share value based on the residual income valuation

model. We also compare our value estimate to Starbucks' share price at the time of the case

to provide an investment recommendation. The market equity beta for Starbucks at the end

of $2012$ is $0\mathrm{.}75.$ Assume that the risk$-$free interest rate is $3\mathrm{.}0\%$ and the market risk premium

is $6\mathrm{.}0\%.$ Starbucks has $749\mathrm{.}3$ million shares outstanding at the end of $2012.$ At the start of

Year $+1,$ Starbucks' share price was $$50\mathrm{.}15.$

REQUIRED

Part I$-$Computing Starbucks' Share Value Using the Residual Income Valuation Approach

a$.$ Use the CAPM to compute the required rate of return on common equity capital for Starbucks.

b$.$ Using your projected financial statements from Integrative Case $10\mathrm{.}1$ for Starbucks, derive

the projected residual income for Starbucks for Years $+1$ through $+5.$

c$.$ Project the continuing residual income in Year $+6.$ Assume that the steady$-$state, long$-$

run growth rate will be $3\%$ in Year $+6$ and beyond. Project that the Year $+5$ income

statement and balance sheet amounts will grow by $3\%$ in Year $+6$ ; then derive the pro$-$

jected residual income for Year $+6.$

d$.$ Using the required rate of return on common equity from Requirement a as a discount

rate, compute the sum of the present value of residual income for Starbucks for Years $+1$

through $+5.$

e$.$ Using the required rate of return on common equity from Requirement a as a discount

rate and the long$-$run growth rate from Requirement $c,$ compute the continuing value of

Starbucks as of the start of Year $+6$ based on Starbucks' continuing residual income in

Year $+6$ and beyond. After computing continuing value as of the start of Year $+6,$

discount it to present value at the start of Year $+1.$

f$.$ Compute the value of a share of Starbucks common stock.

$(1)$ Compute the total sum of the present value of all future residual income $($from

Requirements $d$ and e$).$

$(2)$ Add the book value of equity as of the beginning of the valuation $($that is$,$ as of the

end of $2012,$ or the start of Year $+1).$

$(3)$ Adjust the total sum of the present value of residual income plus book value of com$-$

mon equity using the midyear discounting adjustment factor.

$(4)$ Compute the per$-$share value estimate.

Part II$-$Sensitivity Analysis and Recommendation

Using the residual income valuation approach, recompute the value of starbucks shares

under two alternative scenarios.

that Starbucks' required rate of return on equity is $1$ percentage point higher than

the rate you computed using the CAPM in Requirement a$.$